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Supply Hits High In Condo Craze

Bellemeade Farms is a 316-unit condo conversion in Leesburg.
Bellemeade Farms is a 316-unit condo conversion in Leesburg. (Business Wire)
By Kirstin Downey
Washington Post Staff Writer
Thursday, October 6, 2005

Developers eager to capitalize on the local condo frenzy of the past several years are planning some 47,000 units in dozens of projects that will hit the market in the Washington area in the next three years, according to a new report -- about five times as many units as were sold last year.

Demand is up, even compared with a year ago, when eager buyers routinely waited in early-morning lines for a shot at a contract, according to the report from Delta Associates, an Alexandria real estate research firm that tracks the condo construction market here. But supply is up even more sharply, as developers bet that the momentum will continue.

"You don't see people throwing money at listings anymore, like in 2001, 2002 and 2003. . . . There are hundreds, if not thousands, coming on line in Logan Circle in the next year or so, and hundreds more on Massachusetts Avenue. That's a lot of condos. It'll be interesting to see if the market can absorb them," said Mark Gude, a real estate agent with Continental Properties Ltd. in the District.

It's not just a D.C. phenomenon -- there are thousands of new and converted units in the suburbs, too. Developers had more than three times as many condos for sale around the region at the end of September compared with a year earlier: 18,872 units now versus 5,630 then, according to Delta Associates.

But so far, demand appears to be increasing, as well. About 10,157 newly developed condos were sold in the first three quarters of the year, which puts 2005 sales on pace to far outstrip those of 2004, when 9,108 units were sold in the entire year, according to Delta Associates.

But, given the increase in supply, condo prices are expected to moderate after several years in which many properties appreciated 20 percent or more annually.

"It's gone from being a straight-up, red-hot market, trees growing to the sky, to a marketplace that is now competitive," said economist Gregory H. Leisch, Delta's chief executive.

Nationally, the manic pace in condominium sales in markets such as South Florida, Las Vegas and California has made analysts question whether the sector has become overpriced and unbalanced.

In the Washington area, many industry observers are questioning whether this region, too, may face a glut. One possibility, however, is that there may be more pent-up demand for projects than developers have been able to satisfy.

Many of the new projects in the Washington area have unusual features -- introducing urban, high-rise living to new suburban downtowns in Reston, Rockville and Shirlington, for example -- that may draw more older buyers into the condo market.

Other properties, largely rentals that are being converted into condominiums, will offer people previously priced out of the housing market the opportunity to buy.

For buyers, it means more choice than in the recent past. Daniel Kaufman, 38, a lawyer at the Federal Trade Commission, is a New York City native who was looking for something more innovative than the traditional D.C. condo but had trouble finding it. Today, he will move into a $450,000 unit in a new building at 2020 12th St. NW, a loft-style project.

"It's great," Kaufman said. "There are lots of new exciting developments going up, and people are moving into neighborhoods they weren't moving into before."

One reason there are more condos for sale is that many rental properties are being converted to condos. Virginia is one of the hottest condo-conversion markets in the country. Fifteen apartment complexes about 89 percent of the total apartment-sales volume -- were sold for conversion to condos there in the past year, according to Real Capital Analytics, a real estate information firm.

Regionwide, 24 rental complexes were sold in the past year for conversion, according to Real Capital.

Among the condo conversions in the region are Summit Square, an Oakton apartment complex, being marketed now as the Four Winds at Oakton, and Vaughan Place at McLean Gardens, a rental-to-condo conversion in the District that will go on the market soon. About 48 percent of the condos that have sold this year have been rental-to-condo conversions, according to Delta Associates, and about 33 percent of the total units for sale are conversions.

The trend has been alarming for renters who have been displaced, especially low-income people who had been living in relatively inexpensive apartment complexes. Some local officials fear a further erosion of the region's already-diminishing pool of affordable housing.

But many of the conversions involve upscale, top-priced rental projects heavy on attractive amenities, where upper-income renters can buy a unit if they wish or easily move elsewhere, in a rental market that has become looser in recent years. In addition, low interest rates and easy credit terms that permit people to buy homes with small down payments allow renters to own more easily, if they choose.

The biggest risk may be to developers and lenders. Nationally, the rate of condo conversions has more than tripled in the past two years, according a Fitch Ratings report in June. Condo-conversion companies are paying apartment-building owners top dollar for such properties -- considerably more than the value of the properties as rentals -- and are borrowing to do so. Fitch analysts said that many markets are "overheated," making it harder for the companies to make the easy profits of past years, and the firm predicts that 10 percent of condo-conversion loans will default.

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